PayPal’s payment app Venmo processed $700 million in payments in the third quarter of 2014.

Despite its volume, PayPal is not making any money off Venmo because it is currently free and is not accepted at businesses.

Venmo could be a threat to banks because it can be described as a “next generation checking account.”

PayPal is successfully competing with banks by issuing business loans.

eBay Inc.’s (NASDAQ: EBAY) PayPal has a payment app that could be more disruptive than Apple Inc.’s (NASDAQ: AAPL) Apple Pay. The app is called Venmo, and it processed payments totaling $700 million in the third quarter of 2014.

PayPal got its hands on Venmo last year when eBay acquired the Chicago-based payment company Braintree. Braintree bought Venmo (which was an independent company) in 2012 for $26.2 million. Bloomberg writer Felix Gillette thinks that Venmo is a potential threat to traditional retail banking and makers of credit card readers such as Square. Gillette even described Venmo as a “next generation checking account.”

Like Apple Pay and PayPal itself, Venmo gives users a digital wallet that can be used to access cash in a bank account. The difference is that the wallet can be shared over a social network. Those on the network can take money out or put money in; for example, a group of twenty-something guys can use it to pay for the beer on a night out on the town.

A Google for Financial Transactions

Unlike Apple Pay, Venmo cannot be used at businesses or to pay bills yet, but users do have the ability to access credit card balances through it. PayPal wants to change that because Venmo has been highly successful. Venmo processed $700 million worth of payments in third quarter 2014, up from $141 million in the same period in 2013, Bloomberg’s Gillette reported.

Currently, PayPal is not making any money off of Venmo because it has no business uses and the app itself is free. Braintree and Venmo CEO Bill Ready claims that giving Venmo away free is a means of getting people hooked on payment apps. It is also a great means of collecting a lot of real world data about payment processing, something that gives PayPal an edge over Apple, which just got into payment processing.

Eventually, Ready hopes that merchants will pay a fee for the privilege of taking Venmo payments, much as they pay a fee for using a credit card. He did not say when or how that would happen. Ready imagines Venmo as simply another gateway by which Braintree’s payment processing software can be accessed.

In a recent Bloomberg interview, Ready makes Venmo and Braintree sound like a sort of Google for financial transactions. That is an open sourced platform through which a wide variety of transactions are made. The difference is that Braintree’s transactions are financial.

Is It Really a Threat to Banks?

Okay, so PayPal has some exciting technology in the pipeline that could throw a serious monkey wrench into Apple Pay’s plan, but will it be a good investment when eBay spins it off next year? Is PayPal really a threat to banks like Gillette and Mike Hirst, the managing director of Australia’s Bendigo and Adelaide Bank, think?

Hirst told his shareholders that he thinks digital wallets could hurt banks by taking money out of low cost deposits. Hirst singled out PayPal as the kind of non-bank alternative he views as a threat to his business. He thinks it could be a threat because banks make much of their revenue these days from fees charged on various kinds of transactions.

It might be too early to tell, but one thing is clear: PayPal is making money and processing a lot of payments. PayPal reported a TTM revenue of $6.6 billion in 2013, up 20% from 2012.

PayPal reported a net total payment volume of $56.6 billion in the third quarter 2014; that was 29% or nearly a third greater than the same period in 2013. PayPal’s Merchant Services which processes business payments processed $42.2 billion in third quarter 2014, a 37% increase over third quarter 2013.

PayPal customers made 895 million transactions, or 9.7 million transactions every day, in third quarter 2014. PayPal processed $7,118 in total payment volume a second in the third quarter of 2014.

PayPal has the sheer volume of payments and cash transactions to be a threat to banks without Venmo being accepted at merchants. PayPal is also going after some other areas of banks’ business: lending.

PayPal the Lender

PayPal and its archrival, the privately-held Square Inc., extended $275 million in credit to businesses in the past year, Bloomberg reported. The credit takes the form of hard money loans secured by the cash flow that passes through a business’s PayPal or Square accounts. PayPal takes a portion of the cash flow to repay the loan. PayPal also charges around 12% in loan fees (interest fees) on the loans; Square apparently charges 10% to 14%.

Some businesspeople prefer the PayPal and Square loans because there is less hassle and paperwork associated with them than bank loans and lower interest charges than credit cards. A big advantage to those loans is that they are fast; you can get one in just a few minutes, obviously an attraction for an entrepreneur that is strapped for time. The entrepreneur can also access the funds quickly, which can be a life saver for a small businessperson.
PayPal has successfully entered another area of banks’ business, just as it also processes credit card payments. PayPal has demonstrated an impressive capacity for entering new businesses and profiting from them with easy-to-use products the public likes. It looks as if PayPal is starting to act a lot like a bank, something that’s bound to attract the attention of regulators in the U.S. and other countries sooner or later.

PayPal vs. Banks

One has to wonder if PayPal will start lending money through Venmo at some point; if it does and regulators were to allow it, that would be a serious threat to traditional banks. Traditional banks are not that popular to begin with, and some of them are struggling to maintain their revenue.

Bank of America Corporation (NYSE: BAC), which has been labeled “America’s Least Popular Bank,” reported that its quarterly revenue growth fell by 3.10% between Third Quarter 2013 and Third Quarter 2014. JPMorgan Chase & Company (NYSE: JPM) reported a quarterly year to year revenue growth rate of -.7% between Third Quarter 2013 and Third Quarter 2014. In contrast, Wells Fargo & Co (NYSE: WFC) reported a year to year quarterly revenue growth rate of 2.20% between Third Quarter 2013 and Third Quarter 2014.

The big consumer banks are already facing stiff competition from online bankers like EverBank Financial(NYSE: EVER) and Bank of Internet (NASDAQ: BOFI) as well as prepaid card solutions such as Green Dot (NYSE: GDOT). Now they face the specter of an independent PayPal with a killer payment app named Venmo.

It looks as if the entire financial services industry is about to get completely disrupted. Banks futures are completely uncertain because of the advent of payment apps and the growing power of PayPal.